It Had To Be.

Stephen Bland looks at Lloyds TSB, the latest purchase for his new High Yield Portfolio.

Lloyds TSB (LSE: LLOY) . The bank share that you couldn't exclude from any HYP (High Yield Portfolio) constructed for quite some years now. An HYP without Lloyds would be like Hamlet without Yorrick. At least until another bank becomes a higher yielder. Which will happen for certain sooner or later.

Not only is Lloyds the highest yielding bank by quite some way, it also enjoys the somewhat dubious distinction of being the highest yielding share in the FTSE100 index of those with an established record of dividends. It's been around that position for what seems like centuries, explaining why it has appeared in all my HYPs since I launched the concept on The Fool almost six years ago.

Readers will probably know that my normal method of constructing an HYP is to rank the FTSE100 by descending yield and to pick a share from each sector that satisfies my criteria until I have as many as I think necessary. In the past, that's been fifteen. However I jumped out of line last month for my first HYP4 purchase. I bought BP (LSE: BP) because I like an oil share in the portfolio and this share was at what I perceived to be an attractive price which I wanted to catch. Having done that, I'm back to my traditional approach of portfolio construction.

My buying price for Lloyds in this portfolio including costs is about 544p and on a dividend of 34.2p that delivers a yield of some 6.3%. That yield is something like twice the current big cap market average and well in excess of the available interest rates on gilts or bank deposits. Oddly perhaps, Lloyds shares have a much greater yield than any of the bank's savings accounts

The big question that some people may ask, particularly beginners, is why is a company as big as Lloyds on a yield more commonly seen with companies in difficulties that may be on the verge of cutting their dividends? In fact, many thought in recent years that Lloyds would cut its dividend but it never happened. Now, that looks unlikely. Yet it remains on this very high yield.

Lloyds hasn't cut the dividend, but it hasn't increased its dividend for several years either, which may be the principal explanation for the very high yield by bank standards, along with the associated fact that eps has trailed the growth of other banks. The 34.2p payout has become a fixture.

Other banks have been increasing their dividends along with rising eps which clearly makes their shares more attractive for some, though as I have pointed out before, given the magnitude of the yield premium of Lloyds, it would take quite a few years before the total income from the second highest yielding bank equalised with it. During that time, there has to be a reasonable chance that Lloyds will itself resume dividend increases.

One of my criteria for HYP shares is a growing historical dividend over the last few years but this is a case where I am willing to forego that requirement in return for the much higher start yield. This is why I have to date preferred Lloyds in HYPs over other banks. Bear in mind the essential point that HYPs are primarily about income.

The reason Lloyds has not been increasing its dividend is that earnings have been insufficient in the board's view to do so. I think the bank has said that it wants cover to reach 1.5 before any dividend increases are considered. Looking at analysts' forecasts, I notice that one or two suggest this may occur in the year to 31/12/07 but most are predicting more of the same. So don't hold your breath about Lloyds dividend increases.

My policy of strategic ignorance means I avoid any such agonising. As long as the dividend appears as secure as can reasonably be expected, then the actual reasons for its current level, and what may happen in the longer term future of Lloyds compared with other banks are not something upon which investors should waste much thought. I see little real differences between the big banks. In the past other banks have been in or out of favour for various reasons and this changes over time according to how profitability and investor sentiment varies.

Stephen holds shares in BP and Lloyds